ConvergEx Develops New Order Routing Strategy to IEX & Its Own Dark Liquidity Algo

The agency broker is giving the buy side a choice of routing a percentage of an order to IEX while designating a percentage to go through ConvergEx's Darkest, an algo connected to 20+ unlit venues.

ConvergEx Group has developed a US equities order routing strategy that lets institutional clients earmark a percentage of an order to be sent to the IEX dark pool. The balance of the order is sent to ConvergEx's Darkest algorithm for connectivity with more than 20 other dark pools.

The firm said the move is a result of venue analysis of IEX executions that showed buy-side client orders were protected from latency arbitrage and from adverse price impacts.

"Our quant team is constantly doing due diligence on the venues sourcing liquidity, not only for algo performance but for the best ways to access liquidity and price impact," Oliver Sung, ConvergEx's head of US electronic execution, told us in an interview today.

ConvergeEx began routing customer orders to IEX in November of last year. Sung said in a press release that the company decided to expand the relationship after its analysis confirmed that institutional clients were receiving "excellent execution quality."

In the interview, he said IEX "continually came up on top in terms of our pricing metric. Looking at the price before the print and after the print, we saw no significant statistical deviation from our execution prices, which tells us this model is working."

ConvergEx has been rolling this out softly and has had positive client feedback, he said; in fact, nearly every client has asked to be turned on to this strategy.

[Join the Women in Technology Panel & Luncheon at Interop on Wednesday, Oct. 1. How different are IT career paths and opportunities for men and women in 2014? Join your peers for an open forum discussing how to advance in an IT organization, keep your skills sharp, and build a mentoring network].

This also allows institutions to route more block-size orders to IEX while sourcing liquidity from other dark pools. Institutional clients are frustrated about the inability to get block size into IEX when using a dark aggregation strategy, said Sung. Instead of sending an order via direct market access (DMA) into IEX, this gives clients a dual strategy. "You can rest a good portion of an order inside IEX. You can rest the other orders into our Darkest algorithm, which is connected to more than 20 other dark venues. If there is more liquidity to had away from IEX, we'll send you more liquidity."

Clients have a choice of routing 25% or 50% of their order to IEX and allocating the rest to the Darkest algorithm. Most clients are choosing the 50/50 split, he said. Under that scenario, if a client's parent order has, say, 100,000 shares, 50,000 shares will go to work in the 20-plus ATSs to which Darkest is connected.

Data confirms IEX is more than a speed bumpIEX delays an order by 350 microseconds through its magic shoebox to prevent aggressive orders from trading ahead of institutional client orders resting on its matching engine before updates. However, "IEX is more than the speed bump," Sung told us.

"It's the whole package, and it's a very attractive venue for us on the pricing side of the world. Our data confirms that," he said. "It's something that we shared with them, and that led to this collaboration."

Sung joined ConvergEx four weeks ago from Bank of America Merrill Lynch, where he was most recently a director and product manager for the NextGen Algo Engine.

IEX president and chief executive officer Brad Katsuyama said in the release:

IEX's market is designed to eliminate structural inefficiencies and improve trading performance. ConvergEx's data offers third-party evidence that we've succeeded in effectively eliminating latency arbitrage. The Darkest + IEX strategy provides an exciting new way to access our marketplace, and shows that ConvergEx shares our commitment to helping investors take charge of where their orders are executed.

Sung told us institutions want to get more block liquidity into IEX, but in general, the buy side doesn't want to DMA an order directly to one dark pool. "This IEX strategy+Darkest strategy puts blocks into IEX while sourcing liquidity through the liquidity aggregator. We're maximizing the benefit that they can get out of IEX while sourcing liquidity."

Darkest doesn't favor one venue over another, he said. ConvergEx has ATSs -- Millennium and Vortex, which are among the 20+ dark pools to which Darkest is connected. "We have an equal allocation strategy to all venues, whether the bulge bracket or agency or our ATSs. Everyone has an equal shot. As an agency-focused shop, we have to be completely agnostic. Even though we have our own dark pools, we don't favor them at all."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio